[Code of Federal Regulations]
[Title 26, Volume 4]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.337(d)-1]

[Page 72-78]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.337(d)-1  Transitional loss limitation rule.

    (a) Loss limitation rule for transitional subsidiary--(1) General 
rule. No deduction is allowed for any loss recognized by a member of a 
consolidated group

[[Page 73]]

with respect to the disposition of stock of a transitional subsidiary.
    (2) Allowable loss--(i) In general. Paragraph (a)(1) of this section 
does not apply to the extent the taxpayer establishes that the loss is 
not attributable to the recognition of built-in gain by any transitional 
subsidiary on the disposition of an asset (including stock and 
securities) after January 6, 1987.
    (ii) Statement of allowable loss. Paragraph (a)(2)(i) of this 
section applies only if a separate statement entitled ``Allowable Loss 
Under Sec. 1.337(d)-1(a)'' is filed with the taxpayer's return for the 
year of the stock disposition. If the separate statement is required to 
be filed with a return the due date (including extensions) of which is 
before January 16, 1991, or with a return due (including extensions) 
after January 15, 1991 but filed before that date, the statement may be 
filed with an amended return for the year of the disposition or with the 
taxpayer's first subsequent return the due date (including extensions) 
of which is after January 15, 1991.
    (iii) Contents of statement. The statement required under paragraph 
(a)(2)(ii) of this section must contain--
    (A) The name and employer identification number (E.I.N.) of the 
transitional subsidiary.
    (B) The basis of the stock of the transitional subsidiary 
immediately before the disposition.
    (C) The amount realized on the disposition.
    (D) The amount of the deduction not disallowed under paragraph 
(a)(1) of this section by reason of this paragraph (a)(2).
    (E) The amount of loss disallowed under paragraph (a)(1) of this 
section.
    (3) Coordination with loss deferral and other disallowance rules. 
(i) For purposes of this section, the rules of Sec. 1.1502-20(a)(3) 
apply, with appropriate adjustments to reflect differences between the 
approach of this section and that of Sec. 1.1502-20.
    (ii) Other loss deferral rules. If paragraph (a)(1) of this section 
applies to a loss subject to deferral or disallowance under any other 
provision of the Code or the regulations, the other provision applies to 
the loss only to the extent it is not disallowed under paragraph (a)(1).
    (4) Definitions. For purposes of this section--
    (i) The definitions in Sec. 1.1502-1 apply.
    (ii) Transitional subsidiary means any corporation that became a 
subsidiary of the group (whether or not the group was a consolidated 
group) after January 6, 1987. Notwithstanding the preceding sentence, a 
subsidiary is not a transitional subsidiary if the subsidiary (and each 
predecessor) was a member of the group at all times after the 
subsidiary's (and each predecessor's) organization.
    (iii) Built-in gain of a transitional subsidiary means gain 
attributable, directly or indirectly, in whole or in part, to any excess 
of value over basis, determined immediately before the transitional 
subsidiary became a subsidiary, with respect to any asset owned directly 
or indirectly by the transitional subsidiary at that time.
    (iv) Disposition means any event in which gain or loss is 
recognized, in whole or in part.
    (v) Value means fair market value.
    (5) Examples. For purposes of the examples in this section, unless 
otherwise stated, the group files consolidated returns on a calendar 
year basis, the facts set forth the only corporate activity, and all 
sales and purchases are with unrelated buyers or sellers. The basis of 
each asset is the same determining earnings and profits adjustments and 
taxable income. Tax liability and its effect on basis, value, and 
earnings and profits are disregarded. Investment adjustment system means 
the rules of Sec. 1.1502-32. The principles of this paragraph (a) are 
illustrated by the following examples:

    Example 1. Loss attributable to recognized built-in gain. (i) P buys 
all the stock of T for $100 on February 1, 1987, and T becomes a member 
of the P group. T has an asset with a value of $100 and basis of $0. T 
sells the asset in 1989 and recognizes $100 of built-in gain on the sale 
(i.e., the asset's value exceeded its basis by $100 at the time T became 
a member of the P group). Under the investment adjustment system, P's 
basis in the T stock increases to $200. P sells all the stock of T on 
December 31, 1989, and recognizes a loss of $100. Under paragraph (a)(1) 
of this section, no deduction is allowed to P for the $100 loss.

[[Page 74]]

    (ii) Assume that, after T sells its asset but before P sells the T 
stock, T issues additional stock to unrelated persons and ceases to be a 
member of the P group. P then sells all its stock of T in 1997. Although 
T ceases to be a subsidiary within the meaning of Sec. 1.1502-1, T 
continues to be a transitional subsidiary within the meaning of this 
section. Consequently, under paragraph (a)(1) of this section, no 
deduction is allowed to P for its $100 loss.
    Example 2. Loss attributable to post-acquisition loss.
    P buys all the stock of T for $100 on February 1, 1987, and T 
becomes a member of the P group. T has $50 cash and an asset with $50 of 
built-in gain. During 1988, T retains the asset but loses $40 of the 
cash. The P group is unable to use the loss, and the loss becomes a net 
operating loss carryover attributable to T. Under the investment 
adjustment system, P's basis in the stock of T remains $100. P sells all 
the stock of T on December 31, 1988, for $60 and recognizes a $40 loss. 
Under paragraph (a)(2)(i) of this section, P establishes that it did not 
dispose of the built-in gain asset. None of P's loss is disallowed under 
paragraph (a)(1) if P satisfies the requirements of paragraph (a)(2)(ii) 
of this section.
    Example 3. Stacking rules--postacquisition loss offsets 
postacquisition gain. (i) P buys all the stock of T for $100 on February 
1, 1987, and T becomes a member of the P group. T has 2 assets. Asset 1 
has a basis and value of $50, and asset 2 has a basis of $0 and a value 
of $50. During 1989, asset 1 declines in value to $0, and T sells asset 
2 for $50, and reinvests the proceeds in asset 3. The value of asset 3 
appreciates to $90. Under the investment adjustment system, P's basis in 
the stock of T increases from $100 to $150 as a result of the gain 
recognized on the sale of asset 2 but is unaffected by the unrealized 
post-acquisition decline in the value of asset 1. On December 31, 1989, 
P sells all the stock of T for $90 and recognizes a $60 loss.
    (ii) Although T incurred a $50 post-acquisition loss of built-in 
gain because of the decline in the value of asset 1, T also recognized 
$50 of built-in gain. Under paragraph (a)(2) of this section, any loss 
on the sale of stock is treated first as attributable to recognized 
built-in gain. Thus, for purposes of determining under paragraph (a)(2) 
of this section whether P's $60 loss on the disposition of the T stock 
is attributable to the recognition of built-in gain on the disposition 
of an asset, T's unrealized post-acquisition gain of $40 offsets $40 of 
the $50 of unrealized post-acquisition loss. Therefore, $50 of the $60 
loss is attributable to the recognition of built-in gain on the 
disposition of an asset and is disallowed under paragraph (a)(1) of this 
section.
    Example 4. Stacking rules--built-in loss offsets built-in gain. (i) 
P buys all the stock of T for $50 on February 1, 1987, and T becomes a 
member of the P group. T has 2 assets. Asset 1 has a basis of $50 and a 
value of $0, and asset 2 has a basis of $0 and a value of $50. During 
1989, T sells asset 1 for $0 and asset 2 for $50, and reinvests the $50 
proceeds in asset 3. The value of asset 3 declines to $40. Under the 
investment adjustment system, P's basis in the stock of T remains $50 as 
a result of the offsetting gain and loss recognized on the sale of 
assets 1 and 2 and is unaffected by the unrealized post-acquisition 
decline in the value of asset 3. On December 31, 1989, P sells all the 
stock of T for $40 and recognizes a $10 loss.
    (ii) Although T recognized a $50 built-in gain on the sale of asset 
2, T also recognized a $50 built-in loss on the sale of asset 1. For 
purposes of determining under paragraph (a)(2) of this section whether 
P's $10 loss on the disposition of the T stock is attributable to the 
recognition of built-in gain on the disposition of an asset, T's 
recognized built-in gain is offset by its recognized built-in loss. Thus 
none of P's $10 loss is attributable to the recognition of built-in gain 
on the disposition of an asset.
    (iii) The result would be the same if, instead of a $50 built-in 
loss in asset 2, T has a $50 net operating loss carryover when P buys 
the T stock, and the net operating loss carryover is used to offset the 
built-in gain.
    Example 5. Outside basis partially corresponds to inside basis. (i) 
Individual A owns all the stock of T, for which A has a basis of $60. On 
February 1, 1987, T owns 1 asset with a basis of $0 and a value of $100, 
P acquires all the stock of T from A in an exchange to which section 
351(a) applies, and T becomes a member of the P group. P has a carryover 
basis of $60 in the T stock. During 1988, T sells the asset and 
recognizes $100 of gain. Under the investment adjustment system, P's 
basis in the T stock increases from $60 to $160. T reinvests the $100 
proceeds in another asset, which declines in value to $90. On January 1, 
1989, P sells all the stock of T for $90 and recognizes a loss of $70.
    (ii) Although P's basis in the T stock was increased by $100 as a 
result of the recognition of built-in gain on the disposition of T's 
asset, only $60 of the $70 loss on the sale of the stock is attributable 
under paragraph (a)(2) of this section to the recognition of built-in 
gain from the disposition of the asset. (Had T's asset not declined in 
value to $90, the T stock would have been sold for $100, and a $60 loss 
would have been attributable to the recognition of the built-in gain.) 
Therefore, $60 of the $70 loss is disallowed under paragraph (a)(2), and 
$10 is not disallowed if P satisfies the requirements of paragraph 
(a)(2). If P had sold the stock of T for $95 because T's other assets 
had unrealized appreciation of $5, $60 of the $65 loss would still be 
attributable to T's recognition of built-in gain on the disposition of 
assets.

[[Page 75]]

    Example 6. Creeping acquisition. P owns 60 percent of the stock of S 
on January 6, 1987. On February 1, 1987, P buys an additional 20 percent 
of the stock of S, and S becomes a member of the P group. P sells all 
the S stock on March 1, 1989 and recognizes a loss of $100. All 80 
percent of the stock of S owned by P is subject to the rules of this 
section and, under paragraph (a) (1) and (2) of this section, P is not 
allowed to deduct the $100 loss, except to the extent P establishes the 
loss is not attributable to the recognition by S of built-in gain on the 
disposition of assets.
    Example 7. Effect of post-acquisition appreciation. P buys all the 
stock of T for $100, and T becomes a member of the P group. T has an 
asset with a basis of $0 and a value of $100. T sells the asset for 
$100. Under the investment adjustment system, P's basis in the T stock 
increases to $200. T reinvests the proceeds of the sale in an asset that 
appreciates in value to $180. Five years after the sale, P sells all the 
stock of T for $180 and recognizes a $20 loss. Under paragraph (a)(1) of 
this section, no deduction is allowed to P for the $20 loss.
    Example 8.  Deferred loss and recognized gain. (i) P is the common 
parent of a consolidated group, S is a wholly owned subsidiary of P, and 
T is a wholly owned subsidiary of S. S purchased all of the T stock on 
February 1, 1987 for $100, and T has an asset with a basis of $40 and a 
value of $100. T sells the asset for $100, recognizing $60 of gain. 
Under the investment adjustment system, S's basis in the T stock 
increases from $100 to $160. S sells its T stock to P for $100 in a 
deferred intercompany transaction, recognizing a $60 loss that is 
deferred under section 267(f) and Sec. 1.1502-13. P subsequently sells 
all the stock of T for $100 to X, a member of the same controlled group 
(as defined in section 267(f)) as P but not a member of the P 
consolidated group.
    (ii) Under paragraph (a)(3) of this section, the application of 
paragraph (a)(1) of this section to S's $60 loss is deferred, because 
S's loss is deferred under section 267(f) and Sec. 1.1502-13. Although 
P's sale of the T stock to X would cause S's deferred loss to be taken 
into account under Sec. 1.1502-13, Sec. 1.267(f)-1 provides that the 
loss is not taken into account because X is a member of the same 
controlled group as P and S. Nevertheless, under paragraph (a)(3) of 
this section, because the T stock ceases to be owned by a member of the 
P consolidated group, S's deferred loss is disallowed immediately before 
the sale and is never taken into account under section 267(f).

    (b) Indirect disposition of transitional subsidiary--(1) Loss 
limitation rule for transitional parent. No deduction is allowed for any 
loss recognized by a member of a consolidated group with respect to the 
disposition of stock of a transitional parent.
    (2) Allowable loss--(i) In general. Paragraph (b)(1) of this section 
does not apply to the extent the taxpayer establishes that the loss 
exceeds the amount that would be disallowed under paragraph (a) of this 
section if each highest tier transitional subsidiary's stock in which 
the transitional parent has a direct or indirect interest had been sold 
immediately before the disposition of the transitional parent's stock. 
In applying the preceding sentence, appropriate adjustments shall be 
made to take into account circumstances where less than all the stock of 
a transitional parent owned by members of a consolidated group is 
disposed of in the same transaction, or the stock of a transitional 
subsidiary or a transitional parent is directly owned by more than 1 
member.
    (ii) Statement of allowable loss. Paragraph (b)(2)(i) of this 
section applies only if a separate statement entitled ``Allowable Loss 
Under Section 1.337(d)-1(b)'' is filed with the taxpayer's return for 
the year of the stock disposition. If the separate statement is required 
to be filed with a return the due date (including extensions) of which 
is before January 16, 1991, or with a return due (including extensions) 
after January 15, 1991 but filed before that date, the statement may be 
filed with an amended return for the year of the disposition or with the 
taxpayer's first subsequent return the due date (including extensions) 
of which is after January 15, 1991.
    (iii) Contents of statement. The statement required under paragraph 
(b)(2)(ii) of this section must contain--
    (A) The name and employer identification number (E.I.N.) of the 
transitional parent.
    (B) The basis of the stock of the transitional parent immediately 
before the disposition.
    (C) The amount realized on the disposition.
    (D) The amount of the deduction not disallowed under paragraph 
(b)(1) of this section by reason of this paragraph (b)(2).
    (E) The amount of loss disallowed under paragraph (b)(1) of this 
section.

[[Page 76]]

    (3) Coordination with loss deferral and other disallowance rules. 
(i) For purposes of this section, the rules of Sec. 1.1502-20(a)(3) 
apply, with appropriate adjustments to reflect differences between the 
approach of this section and that of Sec. 1.1502-20.
    (ii) Other loss deferral rules. If paragraph (b)(1) of this section 
applies to a loss subject to deferral or disallowance under any other 
provision of the Code or the regulations, the other provision applies to 
the loss only to the extent it is not disallowed under paragraph (b)(1).
    (4) Definitions. For purposes of this section--
    (i) Transitional parent means any subsidiary, other than a 
transitional subsidiary, that owned at any time after January 6, 1987, a 
direct or indirect interest in the stock of a corporation that is a 
transitional subsidiary.
    (ii) Highest tier transitional subsidiary means the transitional 
subsidiary (or subsidiaries) in which the transitional parent has a 
direct or indirect interest and that is the highest transitional 
subsidiary (or subsidiaries) in a chain of members.
    (5) Examples. The principles of this paragraph (b) are illustrated 
by the following examples:

    Example 1. Ownership of chain of transitional subsidiaries. (i) P 
forms S with $200 on January 1, 1985, and S becomes a member of the P 
group. On February 1, 1987, S buys all the stock of T, and T buys all 
the stock of T1, and both T and T1 become members of the P group. On 
January 1, 1988, P sells all the stock of S and recognizes a $90 loss on 
the sale.
    (ii) Under paragraph (a)(4)(ii) of this section, both T and T1 are 
transitional subsidiaries, because they became members of the P group 
after January 6, 1987. Under paragraph (b)(4)(i) of this section, S is a 
transitional parent, because it owns a direct interest in stock of 
transitional subsidiaries and is not itself a transitional subsidiary.
    (iii) Under paragraph (b) (1) and (2) of this section, because S is 
a transitional parent, no deduction is allowed to P for its $90 loss 
except to the extent the loss exceeds the amount of S's loss that would 
have been disallowed if S had sold all the stock of T, S's highest tier 
transitional subsidiary, immediately before P's sale of all the S stock. 
Assume all the T stock would have been sold for a $90 loss and that all 
the loss would be attributable to the recognition of built-in gain from 
the disposition of assets. Because in that case $90 of loss would be 
disallowed, all of P's loss on the sale of the S stock is disallowed 
under paragraph (b).
    Example 2. Ownership of brother-sister transitional subsidiaries. 
(i) P forms S with $200 on January 1, 1985, and S becomes a member of 
the P group. On February 1, 1987, S buys all the stock of both T and T1, 
and T and T1 become members of the P group. On January 1, 1988, P sells 
all the stock of S and recognizes a $90 loss on the sale.
    (ii) Under paragraph (b) (1) and (2) of this section, no deduction 
is allowed to P for its $90 loss except to the extent P establishes that 
the loss exceeds the amount of S's stock losses that would be disallowed 
if S sold all the stock of T and T1, S's highest tier transitional 
subsidiaries, immediately before P's sale of all the S stock. Assume 
that all the T stock would have been sold for a $50 loss, all the T1 
stock of a $40 loss, and that the entire amount of each loss would be 
attributable to the recognition of built-in gain on the disposition of 
assets. Because $90 of loss would be disallowed with respect to the sale 
of S's T and T1 stock, P's $90 loss on the sale of all the S stock is 
disallowed under paragraph (b).

    (c) Successors--(1) General rule. This section applies, to the 
extent necessary to effectuate the purposes of this section, to--
    (i) Any property owned by a member or former member, the basis of 
which is determined, directly or indirectly, in whole or in part, by 
reference to the basis in a subsidiary's stock, and
    (ii) Any property owned by any other person whose basis in the 
property is determined, directly or indirectly, in whole or in part, by 
reference to a member's (or former member's) basis in a subsidiary's 
stock.
    (2) Examples. The principles of this paragraph (c) are illustrated 
by the following examples:

    Example 1. Merger into grandfathered subsidiary. P, the common 
parent of a group, owns all the stock of T, a transitional subsidiary. 
On January 1, 1989, T merges into S, a wholly owned subsidiary of P that 
is not a transitional subsidiary. Under paragraph (c)(1) of this 
section, all the stock of S is treated as stock of a transitional 
subsidiary. As a result, no deduction is allowed for any loss recognized 
by P on the disposition of any S stock, except to the extent the P group 
establishes under paragraph (a)(2) that the loss is not attributable to 
the recognition of built-in gain on the disposition of assets of T.
    Example 2. Nonrecognition exchange of transitional stock. (i) P, the 
common parent of a

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group, owns all the stock of T, a transitional subsidiary. On January 1, 
1989, P transfers the stock of T to X, a corporation that is not a 
member of the P group, in exchange for 20 percent of its stock in a 
transaction to which section 351(a) applies. T and X file separate 
returns.
    (ii) Under paragraph (c)(1) of this section, all the stock of X 
owned by P is treated as stock of a transitional subsidiary because P's 
basis for the X stock is determined by reference to its basis for the T 
stock. As a result, no deduction is allowed to P for any loss recognized 
on the disposition of the X stock, except to the extent permitted under 
paragraph (a) of this section.
    (iii) Under paragraph (c)(1), X is treated as a member subject to 
paragraph (a) of this section with respect to the T stock because X's 
basis for the stock is determined by reference to P's basis for the 
stock. Moreover, all of the T stock owned by X continues to be stock of 
a transitional subsidiary. As a result, no deduction is allowed to X for 
any loss recognized on the disposition of any T stock, except to the 
extent permitted under paragraph (a) of this section.

    (d) Investment adjustments and earnings and profits--(1) In general. 
For purposes of determining investment adjustments under Sec. 1.1502-32 
and earnings and profits under Sec. 1.1502-33(c) with respect to a 
member of a consolidated group that owns stock in a subsidiary, any 
deduction that is disallowed under this section is treated as a loss 
arising and absorbed by the member in the tax year in which the 
disallowance occurs.
    (2) Example. (i) In 1986, P forms S with a contribution of $100, and 
S becomes a member of the P group. On February 1, 1987, S buys all the 
stock of T for $100. T has an asset with a basis of $0 and a value of 
$100. In 1988, T sells the asset for $100. Under the investment 
adjustment system, S's basis in the T stock increases to adjustment 
system, S's basis in the T stock increases to $200, P's basis in the S 
stock increases to $200, and P's earnings and profits and S's earnings 
and profits increase by $100. In 1989, S sells all of the T stock for 
$100, and S's recognized loss of $100 is disallowed under paragraph 
(a)(1) of this section.
    (ii) Under paragraph (d)(1) of this section, S's earnings and 
profits for 1989 are reduced by $100, the amount of the loss disallowed 
under paragraph (a)(1). As a result, P's basis in the S stock is reduced 
from $200 to $100 under the investment adjustment system. P's earnings 
and profits for 1989 are correspondingly reduced by $100.
    (e) Effective dates--(1) General rule. This section applies with 
respect to dispositions after January 6, 1987. For dispositions on or 
after November 19, 1990, however, this section applies only if the stock 
was deconsolidated (as that term is defined in Sec. 1.337(d)-2(b)(2)) 
before November 19, 1990, and only to the extent the disposition is not 
subject to Sec. 1.337(d)-2 or Sec. 1.1502-20.
    (2) Binding contract rule. For purposes of this paragraph (e), if a 
corporation became a subsidiary pursuant to a binding written contract 
entered into before January 6, 1987, and in continuous effect until the 
corporation became a subsidiary, or a disposition was pursuant to a 
binding written contract entered into before March 9, 1990, and in 
continuous effect until the disposition, the date the contract became 
binding shall be treated as the date the corporation became a subsidiary 
or as the date of disposition.
    (3) Application of Sec. 1.1502-20T to certain transactions--(i) In 
general. If a group files the certification described in paragraph 
(e)(3)(ii) of this section, it may apply Sec. 1.1502-20T (as contained 
in the CFR edition revised as of April 1, 1990), to all of its members 
with respect to all dispositions and deconsolidations by the certifying 
group to which Sec. 1.1502-20T otherwise applied by its terms 
occurring--
    (A) On or after March 9, 1990 (but only if not pursuant to a binding 
contract described in Sec. 1.337(d)-1T(e)(2) (as contained in the CFR 
edition revised as of April 1, 1990) that was entered into before March 
9, 1990); and
    (B) Before November 19, 1990 (or thereafter, if pursuant to a 
binding contract described in Sec. 1.1502-20T(g)(3) that was entered 
into on or after March 9, 1990 and before November 19, 1990).

The certification under this paragraph (e)(3)(i) with respect to the 
application of Sec. 1.1502-20T to any transaction described in this 
paragraph (e)(3)(i) may not be withdrawn and, if the certification is 
filed, Sec. 1.1502-20T must be applied to all such transactions on all 
returns (including amended returns) on which such transactions are 
included.

[[Page 78]]

    (ii) Time and manner of filing certification. The certification 
described in paragraph (e)(3)(i) of this section must be made in a 
separate statement entitled ``[insert name and employer identification 
number of common parent] hereby certifies under Sec. 1.337(d)-1 (e)(3) 
that the group of which it is the common parent is applying Sec. 
1.1502-20T to all transactions to which that section otherwise applied 
by it terms.'' The statement must be signed by the common parent and 
filed with the group's income tax return for the taxable year of the 
first disposition or deconsolidation to which the certification applies. 
If the separate statement required under this paragraph (e)(3) is to be 
filed with a return the due date (including extensions) of which is 
before November 16, 1991, the statement may be filed with an amended 
return for the year of the disposition or deconsolidation that is filed 
within 180 days after September 13, 1991. Any other filings required 
under Sec. 1.1502-20T, such as the statement required under Sec. 
1.1502-20T(f)(5), may be made with the amended return, regardless of 
whether Sec. 1.1502-20T permits such filing by amended return.

[T.D. 8319, 55 FR 49031, Nov. 26, 1990, as amended by T.D. 8364, 56 FR 
47389, Sept. 19, 1991; 57 FR 53550, Nov. 12, 1992; T.D. 8560, 59 FR 
41674, 41675, Aug. 15, 1994; T.D. 8597, 60 FR 36679, July 18, 1995]